Mexico - Asian fentanyl trade will pose increasing risk to Mexico-based crypto exchanges
Chinese suppliers of fentanyl precursors to Mexican drug trafficking organizations are weaponizing Bitcoin and crypto transactions.
Last year, an economic security commission reported to US Congress on increased cooperation between Chinese chemical suppliers and Mexican drug cartels for the exchange of illicit fentanyl. Illicit fentanyl transactions will likely be a nightmare for Mexico-based crypto exchanges like Bitso, Volabit and others operating in the country.
The US Congressional report cites a C4ADS study describing how Chinese synthetics suppliers are increasingly using a combination of public Bitcoin addresses, private messaging applications and licit chemical identifiers to ship products to Mexican ports. The Zhang Cartel is understood to be a primary supplier of fentanyl to Mexico, operating as Zaron Biotech. The DEA is offering $5 million for information leading to the arrest of its leader.
Fentanyl transactions pose a particularly novel threat to crypto exchanges and Bitcoin infrastructure, like the Lightning Network, because fentanyl transactions are natively digital. There are three sources of fragility in Mexico that set up a complex environment for crypto exchanges that need to comply with anti-money laundering standards.
First, there appears to be dysfunction at the financial intelligence agency (UIF). A scandal last year involving Mexico’s financial intelligence chief Santiago Nieto distracted from setting up an anti-money laundering regime for crypto exchanges like Bitso and Volabit. The UIF’s outdated reporting on suspicious transactions involved a flawed analysis of Jalisco Cartel activity on Volabit’s exchange. President Andrés Manuel López Obrador’s (AMLO) new financial intelligence chief Pablo Gomez insists that the pre-AMLO agency was corrupt.
Second, there is weak security cooperation between Chinese and Mexican authorities regarding fentanyl shipments and digitally-native fentanyl transactions. That means the nuance of how to trace and combat Bitcoin-based transactions is even further away from reality.
Third, AMLO’s priority is physical security - not financial security. This is somewhat understandable since cartel violence is a major political issue in Mexico and his campaign depended on rooting out corruption in the military and reforming the country’s broken security tactics. Mexico is in the midst of a fierce debate on restructuring the military’s role in civil society. The flip-side of this is that financial surveillance of Mexican fentanyl markets is likely receiving less attention within the military. Seizures are presently more important.
Mexico is a key transshipment point for global fentanyl markets. Simultaneously, Bitso is trying to capture market share in cross-border payments. For a drug market that is digitally native and prefers to do business through Chinese messaging apps and public Bitcoin addresses, there is good reason for Mexican-based crypto exchanges to be concerned with a lack of governance coming from Mexican authorities.
Bitcoin’s infrastructure build out depends on adoption plus good governance. The risk is that companies operating in Mexico could be deterred from adopting Bitcoin and Lightning Network payment methods if they perceive radioactivity associated with terrorist financing. Illicit fentanyl markets will be a difficult environment to maneuver.